Strong Barrel Sales Herald Strong Industry

American oak supply strained as U.S. becomes largest barrel market in the world

Barrel sales stayed strong in 2014, and coopers are expecting to see another good year in 2015 in spite of significant price increases for American oak.

French oak prices are expected to rise between 3% and 5%, yet the euro has been dropping against a strengthening dollar, and it’s widely expected that trend will continue for the short term at least. American oak barrel prices shot up by as much as 10% for some coopers in 2014 because of supply constraints resulting from the surging demand for whiskey barrels and other factors. That supply issue isn’t expected to abate in 2015, so American oak barrel prices will also increase in the range of 3% to 5% (or higher) this year. Prices for European oak, which includes Hungarian oak, are seeing some increases or staying stable, based on the cooper.

Just as the United States has become the largest wine-consuming nation in the world, it is also the biggest wine barrel market. In June of 2013 the French coopers’ trade association Tonneliers de France reported that its 49 members sold a total of 532,990 barrels worth 332 million euros (or $408 million), which was a 3.6% increase in volume and 3% increase in value. Nearly seven out of every 10 barrels produced in France is exported, and the United States (as the largest export market) is now rivaling French domestic demand. The coopers’ group, which does not include every French barrel maker, reports France and the United States account for 60% of its members’ sales. “The USA is definitely the largest wine barrel market in the world, much larger than France,” said Jason Stout, international sales director for Cooperages 1912. “If you consider Europe to be a single market, then Europe is slightly larger than the USA.”

KEY POINTS

Strong demand continues to push barrel sales as the industry processes two large harvests and continues a recovery from the recession.

Booming sales for whiskey continue to crimp the supply of domestic oak and drive up the price of American oak barrels.

Many winemakers seek a restrained touch of oak, but some are also combining barrels with barrel alternatives.

Rough weather during the past two harvests in Burgundy and Bordeaux reduced France’s barrel needs, while California posted record wine grape crops in 2012 and 2013. Cooperage sales staff, many of whom spoke to Wines & Vines after attending the recent Vinitech-Sifel expo in Bordeaux in December, said the focus for French barrel makers has been the United States (and especially California) for a few years.

It’s a challenge to pin down the total volume of the worldwide barrel market because many of the companies making and selling barrels are privately held firms that seldom release figures about their production volume.

Demand strong; prices creeping higher
Stout said 2014 barrel sales were up slightly over 2013, which is “incredible considering the harvest was smaller.” He said the quality of the 2014 harvest and the strengthening economy helped push barrel sales higher.

Pricing in 2015, however, will be a challenge. Stout said the cost of American oak logs has grown 25%-30% in the past 12 to 18 months. “Cooperage is a small player in the hardwood industry, and we are doing everything possible to hold down costs and still get enough logs to meet demand.” He said Cooperages 1912 has the logs to meet projected demand for 2015-16, but “prices are still high and very volatile.” Stout stressed he does not expect to see a shortage of American oak barrels for the U.S. wine industry. French and European oak should only see “modest” price increases.

Michael Mercer, who sells French oak for Tonnellerie Leroi and American oak barrels from Charlois Cooperage, said the past year was another great vintage and a strong one for barrel sales. He said a slightly smaller harvest in some parts of California’s North Coast was offset by the large harvest in Washington state and the Long Island region of New York.

Mercer said he often makes barrel deliveries himself, and it wasn’t uncommon in 2014 for winemakers to request a few more barrels on the crush pad. “Overall it was pretty much a great harvest for barrel sales,” he said.

He said in 2014 Charlois had to increase its prices 10% because wood prices have shot up at mills as a result of demand from the spirits industry. “It was a huge issue in 2014,” he said. “I’ve never seen anything like it.”

Now that the Cloverdale, Calif.-based cooperage has established some relations with mills back east, Mercer said their wood supply would be a little more dependable.

That’s an advantage for Premier Wine Cask, said president Eric Mercier. The company works with mills in Minnesota and Missouri that only produce staves for wine barrels, so they’ve been able to ensure a steady supply of wood. He said in the past mills regularly had excess wood available for wine barrels, but now that excess is being snapped up for whiskey barrels. “If you’re buying from a broker you’re in trouble,” he said.

The spirits demand was a pleasant surprise for Tonnellerie O,­ said James Herwatt, the company’s chief operating officer. He said the cooperage had purchased a large amount of American oak a few years ago and has been able to use that inventory to support demand from distillers looking to age their products in premium American oak.

At the cooperage in Benicia, Calif., coopers give Tonnellerie O’s American oak wine barrels a deep char, which is what the spirits producers want. “We were actually lucky and fortunate to have sourced quite a bit of wood quite a few years ago anticipating our growth,” he said.

That business from distillers gave the company a very successful 2014, and Herwatt said he doesn’t anticipate any slowdown in demand for spirits barrels in 2015.

Prices for French and American oak went up 3% in 2014, and Herwatt said he expects a similar increase this year because of supply and operating costs. The company recently opened an office in China to serve the growing number of premium wineries opening there.

He said it’s great to see global demand for premium barrels to age high-quality wines returning to levels not seen since the 2008 recession, and the United States is leading that demand. Herwatt said he believes the United States has been the largest barrel market for three to five years. “People want and expect high-quality barrels, and demand them, and are willing to pay for it,” he said.

Martin McCarthy, sales and marketing manager for Tonnellerie Radoux, said the American oak situation is more than just demand for whiskey barrels. He said the U.S. timber industry has still not recovered from the recession that ground new home construction to a halt. Many log cutters left the trade to find work elsewhere. The regions where American oak is harvested also suffered wet summers in recent years, making it impossible to cut trees as well. “All at the same time bourbon is exploding,” he said, adding it was almost a “perfect storm” to constrict the supply of oak for wine barrels.

Radoux has had to raise its American oak prices, but McCarthy said that increase didn’t reflect the true cost increase it saw for wood. “As the wine guys know, you can only absorb part of the price increases until that catches up with you,” he said.

The Radoux American oak barrel now priced around $450, while French oak ranges from $700 to $1,300, and European is in the high $600s per barrel.

Vincent Nadalie, director of sales for Nadalie USA, said the cooperage will raise the price for its American oak barrel, but he’s still not sure exactly how much. He credited the lack of American oak due to whiskey demand and added he hopes the popularity of brown spirits will wane in the next two to three years, as most consumer trends are apt to do.

Nadalie recently was in France for the start of the oak auctions and said prices are starting higher and being driven up for bidding. The Nadalie Prestige tight-grain barrel is priced around $1,100, and prices could increase 3%-4%, but Nadalie was not sure exactly how much when he spoke to Wines & Vines in early December.

Mercier, with Premier Wine Cask, reported that the average price for wood at a recent auction was 14% higher than last year. He said that would push the price of his French oak barrels up nearly 3%. He added that with a weaker euro, and the dollar continuing to strengthen, the price of a Dargaud & Jaegle (French oak) barrel is less than $1,000.

Chris Hansen, general manager at Seguin Moreau Napa Cooperage, said French barrels will see a small price increase in step with the rising cost of wood, and American oak barrel price increases will be much larger (although that increase has yet to be determined). “Wood prices continued to escalate during the past year due to continuing low American oak log supply,” he said.

Hansen said he isn’t sure when the United States took the top spot in terms of barrel sales, but it’s not surprising given how many new barrels American wineries buy and how many new wineries open every year. “The change we have seen is more cooperages are entering the sales market in the USA each year that never sold here before,” he said. “Most winemakers tell us they hear from new coopers every year now.”

Trends in the cellar
The coopers all agreed that winemakers continue to seek “restrained” and “balanced” barrels for their oak programs.

Mercer with Leroi said the cooperage’s medium-long toast continues to be popular for Bordeaux variety wines because it can lift the fruit flavors from a vineyard that generally produces riper grapes. “It’s all about having the fruit forwardness and not having the barrel show,” he said.

Leroi, one of a few coopers to have licensed the barrel-fermentation system first introduced by Tonnellerie Baron and Mercer, said it’s been quite popular.

Radoux’s McCarthy said “flashy” oak is out and winemakers instead want and three-year oak and tight-grain American and French barrels that provide structural support for wine and less of the bold flavors easily perceived in the finished wine.

“Any barrel that is designed to put fruit and terroir up front and soft oak aromatics in the back should be doing well in this market,” said Stout of Cooperages 1912.

Tight-grain continues to be popular, said Nadalie. “What they’re always looking for is more structure and length from the barrels.”

Herwatt, with Tonnellerie O, said more of his firm’s clients are combining barrels and oak alternatives rather than opting for one or the other. The cooperage is part of Cork Supply Group that also includes the alternatives supplier Creative Oak.

He said he has seen winemakers add oak alternatives to a new barrel to extract maximum oak flavor that is then spread throughout a finished blend. Instead of buying 10 new barrels, a winemaker could rather buy five and add alternative products. “More and more wineries are using a combination of barrels and oak alternatives to really flavor wine.”